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New Energy Efficiency as a Service Model Has Potential to Accelerate Investment in Commercial Buildings

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In June 2020 Seattle City Light (SCL) announced that it has selected Gridium, among others, to deliver energy efficiency as a service (EEaaS) to over 1 million square feet of commercial buildings. The first-of-its-kind program, with a regulated utility being involved in an EEaaS agreement, builds on a smaller pilot SCL ran last year. By addressing the long-standing split incentive barrier to energy efficiency, this model could spur rapid growth in the commercial energy efficiency market, but only if other utilities take note.

What Is Energy Efficiency as a Service?

EEaaS agreements are still a relatively new financing mechanism. However, their use is expanding rapidly because they allow customers to forego CAPEX on energy efficiency investments.

In a typical EEaaS agreement, the vendor takes on the performance and financial risk of the transaction and delivers energy efficiency improvements. The client only pays an OPEX-based fee for the service, while the vendor owns, maintains, and operates the energy efficiency equipment to meet savings guarantees. The client benefits from energy savings from day one.

EEaaS addresses two historic barriers to energy efficiency market growth:

  • Clients’ hesitance to spend CAPEX or take on debt for efficiency improvements
  • Length of time required to realize an ROI

Both of these barriers are typical in other project delivery mechanisms. As a result, EEaaS  has been successful in enabling owner-operated commercial sector buildings to make energy efficiency improvements.

SCL’s Model

The model pursued by SCL takes the EEaaS agreement further by including the utility in the project mix. Under this model, based on the Metered Energy Efficiency Transaction Structure (MEETS), the agreement is made between the utility, the building owner, and the efficiency equipment and services vendor. The renters continue to pay their regular bill, with efficiency included as a line item. The savings are collected by the utility and then shared with the building owner and the vendor.

The model is a win-win-win for the vendor, the utility, and the owner, while being financially neutral for the renter. The utility benefits from revenue growth and reliable and at-scale load resources. Meanwhile, building owners save money and renters’ costs do not rise. Renters and owners also benefit through branding—they now occupy or own more sustainable, efficient, and tech-enabled spaces as a result of the program.

Impact of the Model on the Market

By creating a replicable and scalable model, SCL’s program has the potential to revolutionize how energy efficiency projects are implemented in the commercial built environment.

So far, energy efficiency investment in commercial buildings has been minimal because of the split incentive problem. Buildings owners have not been incentivized to pursue energy efficiency because renters would benefit from reduced energy bills. Only owner-occupied buildings could directly reap the financial ROI of efficiency investments.

By integrating a utility into an EEaaS agreement, this model addresses the split incentive barrier. The utility passes the savings on to the building owner rather than the renter, incentivizing owners to participate in the program.

Other utilities will be watching closely the progress of the program, as many have been eyeing the energy as a service market. If successful, utilities could become the final missing link in solving the energy efficiency incentive dilemma, unlocking opportunity in billions of square feet of commercial building space.

Sasha Wedekind's picture

Thank Sasha for the Post!

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Guidehouse
Guidehouse is a leading global provider of consulting services to the public and commercial markets with broad capabilities in management, technology, and risk consulting.

Discussions

Audra Drazga's picture
Audra Drazga on Jul 27, 2020 8:41 pm GMT

Sasha, 

Thanks for sharing this article. I will be excited to see the results from the pilot program.  I hope they will consider sharing their results in the annual PLMA Associations awards.  This would be a good one to include if they have enough traction by that time.

Matt Chester's picture
Matt Chester on Jul 28, 2020 1:21 pm GMT

How long does the EEaaS stay on the bill? Is it until a certain amount for CapEx + fees is paid back, for a set period of time, or is it an ongoing arrangement that would see future EE upgrades integrated with it as well and continue to show up on the bill? 

Sasha Wedekind's picture
Sasha Wedekind on Jul 30, 2020 2:44 pm GMT

Great question, Matt. An average EEaaS contract is signed for 5 to 10 years and can then be extended. Often upgrades can be incorporated at any point, not just at the end of the term.

Peter Key's picture
Peter Key on Jul 30, 2020 2:15 pm GMT

After reading this post, I took another look at the energy efficiency policy recommendations in the plan for combating climate change released by House Democrats late last month to make sure none mentioned energy efficiency as a service. None did. But I did spot two policy recommendations for encouraging energy efficiency investments in commercial buildings. One was to keep in place a tax deduction for energy efficiency investments that is slated to expire at the end of the year. The other was to provide tax incentives to encourage the implementation of energy efficiency technologies in commerical buildings. I don't know if the deduction could be used by any of the parties in the EEaaS chain, but Congress could address that in the legislation to keep the deduction in place. Congress also could design the tax incentives with EEaaS in mind.

Julian Jackson's picture
Julian Jackson on Jul 30, 2020 8:34 pm GMT

An interesting post, I am always glad to see innovative models of going green. This is slightly off at a tangent, but I did a white paper a few years back about the advantages of green industrial and commercial buildings. Not only were environmentally friendly buildings able to get a better ROI, but I discovered there was a hidden bonus - people like to work in a nicer,more sustainable place: so green offices etc, can attract and retain higher quality staff.  A win-win, in my view!

Mike Cassity's picture
Mike Cassity on Aug 5, 2020 3:30 pm GMT

Thanks for sharing. This could be a game changer.

Paul Korzeniowski's picture
Paul Korzeniowski on Aug 5, 2020 4:15 pm GMT

Interesting concept. the aaS model has been used in many other market sectors. Its main benefit is the client avoids the CAPEX costs typically associated with any technology deployment. Also, the software is more modern and easier to run than legacy systems. It will be interesting to see if such potential benefits spur adoption in this market. 

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